Matalan - Back To Yield - Model Update
All,
Please find our updated analysis here.
It's taking longer. The maturity extension has gone as smoothly as was to be expected. Matalan now has more time to recover - time that is needed, considering the slower than expected recovery. But the company is on the right track, and progress is steady. So the bet in the SSNs just improved, and we are not seeing that yet in the bond price.
Investment Rationale
We continue to hold ca. 0.5% of NAV in Matalan shares and 5% of Matalan SSNs for a running yield of ~15%. Following the extension, the credit is now a yield consideration. The bet is merely that the additional stores Matalan is investing in now will bring their pay-off (and that nothing else goes wrong). So we see the bonds as accurately priced, in light of the long history and the equity nature of the bet. But considering the 230 stores in place and the liquidity available, the extrapolation does not require much fantasy. We are more than comfortable here.
Matalan has retained its store base, and the online channel has seen good growth recently (most likely as a discount outlet), but per-store revenue is low now, and the focus must shift from cost management and stabilisation to commercial execution and growth. That's what Nordvall has come for.
To drive per-store performance, the company needs to invest in more merchandise early in the season, which causes higher WC peak requirements. It will have to finance its ambitious refurbishment and new-store program as well as various IT projects, etc. To this end, Matalan has secured an incremental commitment of 25 million from the co-investor group, which was not drawn at the time of the conference call.
One thing of note is that with the collapse of the maturity cascade and the incremental €25m committed super sr. Tranche, the Priority Notes are increasingly less likely to see their sweep give them actual priority over the SSNs.
Key Conclusions
- After adjusting for the unusually strong 14th week, Q2’26 revenues declined, but EBITDA grew on strong margin discipline in a heavily promotional UK retail backdrop; freight surcharges rolled off, marketing spend was cut, stock levels are clean, and September trading remained robust. Management now appears positioned to beat FY guidance even on a week-normalised basis (Current Trading).
- As store and IT investment ramps up, working-capital peaks will require using the remaining £35m of super-senior capacity through a new "short-term" RCF-type facility (Current Trading).
- SSNs are both cash-flow and EV-covered and should expect a straightforward A&E. Their only genuine threat comes from cross-holders with larger equity and super-senior exposure, but any coercive restructuring would be prohibitively expensive and unlikely to do more good than harm, given that Matalan could plausibly refinance in the market within two years (Recap Scenario).
- The valuation is highly sensitive to revenue growth, which the company is essentially borrowing to deliver. Store expansion plus margin normalisation could yield £15–20m EBITDA uplift by 2029, with price increases contributing disproportionately: +2% p.a. adds c.£35m EBITDA, while +3.5% (inflation-aligned) adds c.£55m (DCF).
- Management’s £150m EBITDA ambition is an extreme scenario; our base case, assuming slower store roll-out and historically anchored margins, is still sufficient to refinance the capital structure—just not by 2026 (Model), but rather by 2028. For now, the return on the bonds is a matter of running yield.
Current Trading:
- Q1 FY27 is the first quarter of positive store LFL in the recovery (+3%); Matalan outpaced the market by 2.0ppt and womenswear by 6.6ppt.
- However, management trimmed the top of FY27 guidance to £80-85m from £85-90m despite the +45% Q1 print, on a cautious read of the UK consumer and continued Middle East franchise disruption.
- Unrestricted cash £67m plus £25m committed-undrawn Super Senior provides sufficient liquidity to invest in new stores.
- The consensual 16-month A&E extended all three bond tranches to 2029.
Here to discuss this name with you,
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk